Price impact, defined
Price impact measures how far your order moves the market as it fills. Automated liquidity pools price two assets by the ratio held in the pool, so a trade that consumes a meaningful chunk of one side shifts that ratio. Because the price updates continuously as the pool rebalances, the later part of your order fills at a worse price than the first part did.
On a deep, liquid pair the impact is negligible, because your order is tiny next to the pool. On a thin pair, the same-sized order can move the price noticeably, which shows up as receiving less than a small-order rate implied.
A worked example, conceptually
Picture a pool holding two tokens that trade one-for-one at the current ratio. If you swap an amount that is a small fraction of one side, you barely nudge the ratio, and your effective price is close to the quoted one. Now imagine you try to swap an amount equal to a large share of that side. As your order fills, the pool has less and less of the token you are buying and more of the token you are selling, so each successive unit costs more than the last.
You do not receive the starting price on the whole order. You receive a blended price that reflects how far you moved the pool. That blend is the price impact. The exact figures depend on the pool's depth and design, and no fixed number applies across pairs, but the direction is always the same. Larger order relative to liquidity means larger impact.
Price impact versus slippage
The two get confused because both reduce output, but they have different causes. Price impact comes from your own order size against the available liquidity. It is a property of the trade you are making. Slippage is the price drifting between the moment you quote and the moment you execute, driven by other market activity, not by you.
You control impact by sizing and routing. You manage slippage with a tolerance setting. A good quote can show both figures so you understand where a shortfall comes from and which lever addresses it.
- Price impact: your order moves the pool price. It grows with size and shrinks with liquidity, and you influence it by sizing and routing.
- Slippage: the price changes between quote and execution from outside activity. You manage it with a tolerance.
How to limit price impact
The direct levers are size and route. Splitting a very large order into parts, or routing across deeper liquidity, reduces how far any single fill moves the price. An aggregator helps here by finding routes with the depth to absorb your order at a better effective price, sometimes by spreading it across more than one source of liquidity.
For everyday swap sizes on liquid pairs, price impact is usually small enough to ignore. It becomes worth managing when the order is large relative to the pair's liquidity, which is exactly the case where comparing routes by net received pays off most.